KUALA LUMPUR (Oct 14): Bank’s credit costs could rise to RM29 billion in 2020 and 2021 on the back of higher projected loan impairments, said Bank Negara Malaysia (BNM).
In anticipation of higher credit losses, banks have been shoring up their buffers, adding RM2.7 billion to provisions during the first half of 2020 (1H20).
“At an individual bank level, additional provisions by banks have already risen to an average of 16% of banks’ projected stressed credit losses over a 12-month horizon based on their internal stress tests,” BNM said in its Financial Stability Review for 1H20.
Additionally, BNM said provisions could increase further as banks obtain greater visibility on credit developments based on more informed assessments of borrowers after the end of the blanket moratorium.
The gradual build-up of provisions will also ensure that banks maintain healthy buffers to absorb losses and support continued lending to the economy, it said.
“The impact of stressed credit losses on banks’ solvency would result in the aggregate total capital ratio (TCR) and CET1 capital ratio declining by 2 percentage points (ppts) and 1.4 ppts, respectively, over the next 12-18 months,” it said.
The projections formed part of the findings of the latest stress test conducted by BNM, which said it is an integral component of the central bank’s financial stability framework used to assess and manage risks to financial stability.
Individual banks are projected to have adequate buffers above the regulatory minimum capital requirement to withstand further losses associated with default rates that are eight times higher than the banks’ historical default rates.
“These multiples are significantly more severe than Malaysia’s historical worst experience in the Asian Financial Crisis, during which overall impairments rose by 3-5 times from initial levels.
"The drivers of credit losses were observed to be broadly similar under both the macro simulation and the bottom-up analysis, further affirming that the financial system has adequate buffers to withstand extreme stresses that are more severe than the historical worst experienced to date,” said BNM.
Nevertheless, BNM said with uncertain conditions persisting, banks have been much more proactive in extending repayment assistance, as seen in recent months. This was not taken into account in the simulations.
“Since July, the number of businesses receiving repayment assistance from banks has increased seven-fold. This would improve debt serviceability and mitigate credit losses,” it said.
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